A sound policy framework and skilled economic management have supported the recovery of the Colombian economy over the past year, said the IMF in its regular assessment of Latin America’s fourth largest economy.

“Colombia’s economic prospects are favorable, and the authorities’ continued efforts to implement key macroeconomic and structural reforms will help sustain growth over the medium term,” said the IMF’s mission chief for Colombia, Valerie Cerra.

Growth rebounds

Real growth rebounded strongly in the second half of 2013, driven by higher public investment and a solid expansion in private consumption. Overall, real economic growth in 2013 averaged 4.3 percent, up from 4 percent in 2012.

In light of slow demand growth during the first half of the year, the IMF welcomed the central bank’s decision to hold the policy interest rate low at 3.25 percent between April 2013 and April 2014. The reallocation of central government spending to provide targeted stimulus (for example, through mortgage interest subsidies) and the use of royalties for investment spending by sub-national governments also supported growth in 2013.

“Job creation was robust, particularly in the formal sector of the economy, and the unemployment rate declined to 9.7 percent in 2013, the lowest mark in the last decade,” added Cerra.

At the same time, inflation remained well within the 2–4 percent target range, thanks to well-anchored inflationary expectations.

Favorable outlook

Colombia’s economic outlook is favorable. The economy is projected to grow at around potential—estimated at 4½ percent—in 2014 and beyond. Inflation is expected to remain low, as the authorities are committed to adjust the policy rate as necessary to keep inflation within the target range.

Colombia remains exposed to external risks due to potential spillovers in commodity markets, financial markets, and trade with partner countries. While a pickup in advanced countries’ growth would benefit Colombia, downside risks associated with emerging markets and geopolitical tensions have increased over the past year.

“The authorities have ample policy space to counteract the negative effects of any shocks. Colombia also has a comfortable level of international reserves, reinforced by its access to the IMF’s Flexible Credit Line, which provides insurance to countries with very strong policies and track records,” pointed out Cerra.

Improving policy management

Over the past several years, Colombia’s very strong policy framework—anchored by an inflation-targeting regime, a flexible exchange rate, a structural fiscal balance rule, and effective financial supervision and regulation—has allowed the authorities to respond adequately to shocks and pursue effective demand management.

The authorities have continued to improve the policy framework in recent years, such as by introducing a fiscal sustainability principle in the constitution and overhauling the oil and mining royalties system. In December 2012, they implemented a comprehensive tax reform to reduce nonwage labor costs and inequality.

Fiscal policy will be guided by the fiscal rule, which envisages a gradual reduction of the central government structural deficit over the medium term. The IMF report shows that the medium-term targets under the rule are prudent, given Colombia’s natural resource wealth, but urges decisive policy action for revenue mobilization to achieve the target.

“The authorities are aware of the adjustment challenge to meet the medium-term targets. However, there is broad public support for the fiscal rule and the authorities are committed to its implementation,” added Cerra.

The report said that the financial sector remains sound, and the authorities are making progress on implementing the recommendations in the IMF’s 2013 Financial System Stability Assessment. The IMF also supported measures to increase the access of low-income households to financial services, such as simplifying financial licensing for electronic money issuers to foster competition.

Infrastructure development

The authorities are undertaking an ambitious infrastructure program—centered on improving the quality of transport infrastructure—to be executed through public-private partnerships. The IMF welcomed the authorities’ program, indicating that if successfully implemented, it would help address the infrastructure gap and support Colombia’s sustained economic development.

The IMF report noted that the authorities are taking the right steps to succeed, including a revamping of the legal framework for public-private partnerships approved in 2012, the standardization of public-private partnership contracts, and the creation of a national financial institution specialized in infrastructure financing.

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